M&G Real Estate forecasts strong returns in Continental Europe

The latest European real estate market Outlook published by M&G Real Estate, one of the world‘s largest property investors, predicts that Brexit’s impact on commercial property investment in Continental Europe will be subdued as rental growth performance remains underpinned by strong consumer and business confidence.

Investors in Continental Europe are benefiting from increasing household spending power as well as occupational demand and lack of supply in core locations.

Annual household credit growth and bank loans to businesses rose by 3.9 and 1.9 per cent respectively, according to the European Central Bank (ECB) – demonstrating the positive knock-on effect of the ECB’s Quantitative Easing programme on the ‘real economy’.

The Outlook states that the retail sector in city centre locations has experienced significant rental growth – an indication that the consumer-led Eurozone recovery continues – particularly Paris’ prime retail shop market, which has displayed the strongest growth, expanding over 20 per cent since the start of 2016.

M&G Real Estate predicts, given that UK-based retailers do not represent a dominant source of demand in continental Europe, the continued physical expansion of international retailers on prime European city centre pitches will be unaffected by the Brexit vote.

The Outlook also points to evidence of stronger GDP growth and the lowest unemployment rates in Continental Europe since July 2011, which will further support the office sector market and give developers the confidence to meet future demand with new developments. It is also anticipated that the European office sector will generate average rental growth of 2.3 per cent per annum over the next three years.

Stockholm, Barcelona and Paris are highlighted as driving growth in the office sector markets with year-to-date rental growth of up to 11.5, 5 and 4.8 per cent respectively.

Elsewhere, the logistics sector is proving robust and is predicted to generate average rental growth of 1.1 per cent per annum. The area stretching from Lille to Marseille through the Paris region is an established distribution network and continues to demonstrate strong rental growth performance. Further east, Poznan and Lodz are major regional industrial hubs in Poland and have benefitted from the expansion of e-commerce and proximity to other major networks.

Richard Gwilliam, Head of Property Research at M&G Real Estate, comments: “Rental growth in core locations across continental Europe is performing well and Brexit is proving to have a muted impact on investment sentiment.

“We expect continental European commercial property to remain attractive to investors seeking stable returns.”